Tuesday, September 25, 2018
HEARD IN BEIJING
"We strongly urge the US to immediately correct its mistake and withdraw the so-called sanctions. "
- Wu Qian, Ministry of Defense spokesman
Some context: The US-China tensions are spreading beyond economic concerns. The US recently sanctioned part of the Chinese military for buying military technology from Russia. The PLA hasn't taken too kindly to the move. More in the Tip Sheet below.
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THE TIP SHEET
DRIVING THE DAY
1. The trade war deepens
The US-China trade war has moved into a new, deeper phase.
On Monday, the latest round of tariffs went into effect, with the US slapping fees on USD 200 billion worth of Chinese exports, while China imposed tariffs on USD 60 billion of US goods.
Major equity markets across Asia, Europe, and the US were down Monday, on the back of the news (China markets were closed Monday due to a holiday).
And it gets worse: US President Trump is still talking tough – threatening to impose yet another round of tariffs on another USD 267 billion of Chinese goods.
For its part, China pulled out of the latest round of trade negotiations – which means the two sides are not even having serious discussions right now.
The Chinese say they remain open to talking but not with a knife to their throats. On Monday, the People’s Daily ran a commentary saying:
"The door of China's negotiations has always been open, but the negotiations must be conducted on the premise of mutual respect, equality, trustworthiness and agreement between words and deeds, not under the threat of big sticks of tariffs, and not at the expense of China's right to development."
The grim reality: We are at an impasse on the trade war. This thing now looks set to last a while.
Bloomberg: Trade War Reality Sets In as U.S and China Stick to Their Guns
DRIVING THE DAY, CONT'D
2. White paper on US-China trade lays out China’s position
In reaction to the deepening trade war, the State Council Information Office issued a white paper on US-China trade on Monday.
The 70-plus page paper lays out the state of play in US-China trade –arguing that trade flows are more balanced than the US administration believes.
The paper goes on to defend China’s trade and investment practices – claiming that they are inline with WTO rules and that China has made a lot of progress in opening its markets.
The most interesting part of that section is an extended argument claiming that foreign companies aren’t forced into IP transfers, but they choose to do it out of their own self-interest and primarily transfer old or obsolete technologies.
Lastly, the paper highlights ways that America’s market discriminates against foreign companies, arguing that the US administration is not living up to its own commitments.
Our take: The white paper's explanation of the subtleties in the US-China trade relationship is straightforward and persuasive, echoing what many western economists have been saying. But other parts of the paper are disingenuous. None of it will convince the Trump administration of anything.
The paper does make one thing clear, though. Both China and the US think the other side has rigged the trading relationship to its own advantage.
Xinhua: Full Text: The Facts and China's Position on China-U.S. Trade Friction
China Securities Journal: 中国发布《关于中美经贸摩擦的事实与中方立场》白皮书
SCMP: China accuses US of ‘bullying’ on trade but calls for cooperation
FINANCE & ECONOMICS
3. Getting investment going is still a priority
China’s main economic planning ministry (NDRC) is intently focused on boosting domestic investment, which has been in the dumps lately. The group held a press conference on Monday to outline the latest efforts.
According to NDRC spokesperson Meng Wei, the plan is to (gov.cn):
“focus on infrastructure, agriculture, poverty alleviation, ecological and environmental protection and other key areas.”“establish a coordination mechanism to jointly promote the strengthening of key work in infrastructure and other fields.”
The body will also bring forward some investments in the transport sector that were not meant to break ground until next year.
And it’s not just the NDRC, Premier Li Keqiang has been harping on the need to get infrastructure spending going, as well (second link).
Why it matters: China’s biggest short-term economic challenge is not the trade war, but lackluster infrastructure investment at the local level.
The challenge: After months of being told to reduce risk and control debt, local governments are skittish to put money into big projects.
Get smart: The problem won’t be easily solved. Not only are local governments still confused about current policy priorities, but right now there simply aren’t a lot of shovel-ready projects to invest in.
FINANCE & ECONOMICS
4. End to apartment pre-sales could up-end property market
Bloomberg scoops that the Guangdong government may be bringing a halt to a key financing practice for property developers:
"Guangdong’s provincial housing authority is considering scrapping so-called pre-sales, according to a document seen by Bloomberg News.""The system allows developers to receive the entire sale proceeds upfront before construction has finished, which they then use to finance further land purchases and developments."That could leave lots of developers in the lurch:"The overhaul would threaten to remove the biggest funding channel for developers, after authorities tightened other financing options."According to local authorities, its all about tamping down risk and speculation in the property market:"The current system fuels excessive property investment and has attracted incompetent developers into the industry, according to the document.""Ending it would help reduce the sector’s high leverage and tackle related financial risks."
Get smart: This would be a drastic step and would almost certainly lead to consolidation in the sector, as small, leveraged property developers are unlikely to be able to cope with the new rules.
What to watch: This policy could soon expand to other major property markets throughout the country.
Our take: Such a big change to such an important sector is playing with fire. Monitor this one closely.
Bloomberg: China Developers' Funding Source at Risk in Sales Crackdown
POLITICS & POLICY
5. China halts military dialogue with US over sanctions